FOREX-Dollar advances as Fed tapering in September still seen likely

Wed Aug 21, 2013 4:43pm EDT

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* Fed sheds little light on reduction of Fed asset buying
    * But analysts say September tapering intact

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Aug 21 (Reuters) - The dollar gained across the
board on Wednesday after minutes of the Federal Reserve's
meeting in July suggested that the U.S. central bank was still
on track to taper its asset-buying program next month.
    The minutes showed members of the Federal Open Market
Committee had different opinions as to when the Fed should start
winding down its bond purchases. The overall view, however, was
that the minutes did not materially change the market's
expectation of a September tapering.
    "The tone of the minutes do not meaningfully reduce the risk
of a September taper. They will likely be seen as positive for
the dollar and negative for bonds and stocks," said Omer Esiner,
chief market analyst at Commonwealth Foreign Exchange in
Washington.
    The euro hit a session low against the dollar at $1.3334
after the release of the Fed minutes and was last quoted at
$1.3347, down 0.5 percent. On Tuesday, it reached
$1.3452, according to Reuters data, the highest since Feb. 14.
    FOMC members also acknowledged that the unemployment rate
has dropped considerably since the third round of quantitative
easing began.
    Analysts said the August nonfarm payrolls data, due on
September 6, will be closely watched by investors and
policymakers to determine whether the improvement in the labor
market is enough to justify scaling back the stimulus.  
    The dollar index, which measures the greenback versus a
basket of six currencies, rose 0.6 percent to 81.362.
    Against the yen, the dollar rose to a session high at 97.98
 and last changed hands at 97.78, up 0.5 percent.
    The yen earlier fell after Bank of Japan Governor Haruhiko
Kuroda said he will not hesitate to provide further monetary
stimulus if downside risks to the economy increased.
 
    Analysts at Morgan Stanley said they maintain their bullish
dollar/yen outlook and "consider pullbacks as providing buying
opportunities." They added: "The apparent change in tone by the
BoJ's Kuroda, suggesting that they would not hesitate to ease if
downside risks increase, is likely to help put the yen back on
its weakening trend."
    Growth-linked commodity currencies also extended their
losses as global equity markets came under pressure. The
Australian dollar was down 1.1 percent at US$0.8974.
The New Zealand dollar slid 1.6 percent to US$0.7846.
    
    VOLATILITY RISES
    In the options market, overnight implied volatility rose on
growing uncertainty about the Fed's stimulus. Demand to hedge
against excessive price swings usually rises during times of
financial uncertainty. 
    A gauge of one-month euro implied volatility 
spiked to a three-week high of 7.8 percent, according to Thomson
Reuters data.
    Strategists said the euro's rise would be capped as the
European Central Bank looks set on keeping interest rates at
their current record low of 0.5 percent to support the economy.
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